Consolidation of Banks – Finance secretary

September 30, 2009

The issue of bank consolidation has figured once again with the government saying that public sector banks would need to merge into bigger entities in order to improve upon their competitive strength as the banking industry in the country is opened more liberally to the global banks.

Finance secretary Ashok Chawla said on the issue on Tuesday that subject to synergy and reasonable similarity in culture, public sector banks really needed to look at consolidation and merger over next 5-10 years. He added that in order to support the growth of the economy at 9-10% size was a very important factor.

A number of government committees including the committee on financial systems, whose recommendations laid down the foundations of financial reforms in the country, have earlier argued in favour of greater consolidation. As India opens up its financial system on a growing basis to foreign institutions, in line with commitments made at multilateral trade negotiations and general intentions of the government itself, it has been felt by various quarters that India should have larger domestic banks that can be comparable to global majors. Government of India, Indian Banking Association and Reserve Bank of India (RBI), have all from time to time batted for greater consolidation.

Recommending the consolidation, the finance secretary said, ‘Size is important in today’s world to achieve optimum economies of scale and therefore as a general prescription it would be good for the medium size banks to look at where there are synergies where there are cultural fits and carry forward the process of mergers and acquisition which is essential something which the banks and management have to take a call on.